Temperatures are soaring but Voltas unable to find its cool


Voltas Ltd’s shares are down as much as 14% since it announced its March quarter results (Q4FY22) on Thursday after market hours. The company, which derives a good share of revenues by selling room air conditioners (ACs), put up a weak show. This is despite demand for ACs being strong.

Consolidated operating revenue was flattish year-on-year (y-o-y) at Rs2,634 crore as the decline in the electro mechanical projects & services segment was offset by an increase in revenue in unitary cooling products (UCP) and engineering products & services segment. The UCP segment, which caters to ACs, rose by nearly 10% y-o-y. But this is far lower compared to its peers. Revenue growth in the unitary products segment of Blue Star Ltd stood at 32% y-o-y growth whereas Lloyd’s segment of Havells India Ltd saw 62% y-o-y growth.

Further, higher commodity costs have resulted in a decline in Voltas’ Ebitda (earnings before interest, tax, depreciation and amortization) by 21% y-o-y to Rs261 crore with margin falling by 268 basis points (bps) y-o-y to 9.8%. One basis point is 0.01%. The company has resorted to price hikes but that has fallen short.

Voltas said in the post earnings call that it has taken price hikes in the range of 12-15% in FY22. If commodity prices continue to rise, then the company would look for further price increases.

Even so, some believe Voltas may find it tough to raise prices. “Voltas is already on an average 2-3% higher priced versus peers. Competitors are focusing on increasing volumes, leading to price disruption. We believe Voltas would also be forced to match competitors’ pricing resulting in margin pressure,” said analysts from Kotak Institutional Equities in a report on 9 May.

Voltas has also lost market share due to lower sales in south India. However, the management expects to regain the lost market share through customer centric schemes. “Voltas’ market share slipped from 24% to 22% and 26% to 22% in Q4FY18 and Q3FY19, respectively, and bounced back as demand trends improved in the North and competition gradually raised prices,” added the Jefferies report indicating the market share loss as a blip.

With the recent drop in Voltas’ share price, the returns for the last one year stand at 2.5%. Credit Suisse Securities (India) Pvt. Ltd’s sum-of-the-parts valuation for the Voltas stock attributes about 60% of the value to the cooling business. The broking firm has cut the target price from Rs1,225 to Rs975. “We stay cautious on Voltas and downgrade it to underperform (from Neutral), on its: high dependence on a certain kind of weather, intensely competitive category with extant high market share and margins; and relatively expensive sector valuation,” added the Credit Suisse analysts in a report on 9 May.

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